In a Jan. 17 research note, analyst Edward Sterck with BMO Capital Markets reported that South32 Ltd.'s (S32:ASX) "Q2 FY19 production results came in above our forecasts on average, but are likely to be offset by weaker-than-expected received prices."
Production during Q2 FY19 of all metals except silver and thermal coal was in line with or above BMO's forecasts, Sterck indicated. Received prices were as BMO anticipated except for one metal that exceeded the projection and three that were "a touch weaker."
Sterck provided the specifics for and commented on each commodity.
Alumina production was 1,383,000 tons (1,383 Kt), 6% higher than BMO's estimate, due to strong performance at Worsley. The received price of alumina from Worsley was 4% lower than BMO's forecast.
Aluminium production was 247 Kt, in line with BMO's estimate.
Manganese ore production was 1,439 Kt, 5% higher than BMO's projection due to solid output at Gemco and Samancor. The received price for RSA manganese ore was 4% lower than BMO's estimate.
Nickel production was 10.4 Kt, 3% higher than BMO's forecast.
Met coal production from Ilawarra was 1.6 million tons (1.6 Mt), 60% higher than BMO's estimate "as we were expecting a longwall move this quarter," Sterck noted. The move is now slated for Q3 FY19. The received price for met coal beat BMO's forecast by 9%.
Silver production was 2.9 million ounces, 2% lower than BMO's estimate.
Thermal coal production in South Africa was 6.4 Mt, 15% lower than BMO's estimate due largely to weaker domestic thermal coal output on the heels of the August 2018 dragline event. The dragline is expected to return to service by the end of January 2019. The received price of thermal coal was 15% lower than BMO's forecast.
Compared to H1 FY19 production, current FY19 targets indicate volume growth in alumina and thermal coal, by 9% and 38%, respectively. They suggest aluminum should remain relatively flat, and manganese ore, silver and met coal should drop 13%, 6% and 41%, respectively.
Sterck concluded, however, that "the company remains well-positioned for a strong FY19 as a whole."
In other news, Sterck indicated, South32's current chief financial officer (CFO) Brendan Harris will assume the role of chief marketing officer. Current group treasurer Katie Tovich will fill the CFO position.
BMO has an Outperform rating and a £2.10 per share target price on South32, whose stock is currently trading at around £1.87 per share.
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Disclosures from BMO Capital Markets, South32, January 17, 2019
IMPORTANT DISCLOSURES
Analyst's Certification
I, Edward Sterck, hereby certify that the views expressed in this report accurately reflect our personal views about the subject securities or issuers. I also certify that no part of our compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.
Analysts who prepared this report are compensated based upon (among other factors) the overall profitability of BMO Capital Markets and their affiliates, which includes the overall profitability of investment banking services. Compensation for research is based on effectiveness in generating new ideas and in communication of ideas to clients, performance of recommendations, accuracy of earnings estimates, and service to clients.
Analysts employed by BMO Nesbitt Burns Inc. and/or BMO Capital Markets Limited are not registered as research analysts with FINRA. These analysts may not be associated persons of BMO Capital Markets Corp. and therefore may not be subject to the FINRA Rule 2241 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.
Company Specific Disclosures
Disclosure 9C: BMO Capital Markets makes a market in South32 in Europe.
For Important Disclosures on the stocks discussed in this report, please click here.
